Friday, January 27, 2006

Help a Chicago reader...and an insightful e-mail


This is one of the many e-mails I have received the past few days. I can help with the financial part of things, but I need some people to chime in that have some knowledge of the Chicago market.

Let's take a look at our reader, and see what we can come up with:

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SoCalMtgGuy,

It seems that I'm trying to become a f'd borrower.
Just today I tried to see if we could qualify for a decent rate (if not, there is no sense in buying at all). Lending tree returned offers right away, these are the lowest apr's in each category requested ( 380k loan). I don't know our credit scores.

15 year fixed: 5.405% apr

30 year fixed: 5.893% apr

7/23 ARM, 5.898% apr

I'm thinking of buying in a 3br in the Chicago Loop. We are expecting a baby and need a bigger place. Since our families live far away, we need some room for them to stay when they visit, and we expect stays of 3 months or so. A second baby will probably follow quickly. We'd want to live in this place for a long time, 10 years+. There is low probability that our jobs will take us elsewhere, and the jobs seem relatively secure. We currently rent a super cheap 1br nearby.

We want to spend about 500k with parking (that would be some of the cheapest 3br in the loop; it's easy to find 2br for much more). We have 20% down (barely), and ~200k in income which should grow over time (we are at the beginning of our careers, and no, the income is not RE related:). I figure that a 500k condo would cost us 2600/month in expendables (mortgage interest, tax, assessments, insurance, net of tax benefits). Equivalent rent would be 2200 on the low side, 2800 on the high. I am not counting the opportunity cost of the down payment or any additional maintenance not in the assessment.

I'm looking for a mortgage with the lowest APR possible, fixed for at least 7 years. I don't care about principal repayment, but would like to bring our net worth higher than the value of the condo in 10 years.

The buy/rent decision hinges on the question of the appreciation/depreciation of the condo. A 3% appreciation would make buying it a good deal. Less than that, and it's not a good deal any more. The wife is more adamant about buying than me, but I like the idea as well. Feel free to use it as a example in your blog if you want or find interesting. Your thoughts?
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Well, I like the fact that you are putting money down, and that you have a 6-figure income that appears to be solid per your e-mail. There are a few things I worry about though. You can't shop for rates without knowing a ballpark credit score. Using the lowest advertised rates often leads to disappointment as there are many variables that determine what YOUR rate will be. Most lenders charge more for townhomes and condos than detatched SFR's (single family residences).

My advice would be to get a 30yr year fixed. The spread between a fixed loan and an ARM are so small right now, and the fixed is actually LOWER than the ARM right now (by .005 with your numbers above). I don't think you should pass it up, especially with your time frame. If you plan on staying in the house "10+ years", why would you get a loan that is only fixed for 7 years? Unless you plan on getting the interest-only loan, which I wouldn't advise in your situation, is there any good reason to not get the 30yr fixed?

As far as property taxes, HOA's, and the condition of the Chicago market, I need the help of my 'Windy City' readers. I don't know the market there. 500k for a 3 bedroom townhome would be a 'bargain' in San Diego right now, so we'll have to say what the readers have to say about it.

Even if they haven't had the massive appreciation that California and other places have had, I would still say that you don't have to rush. Take your time and wait for the right place at the right price. I would ideally suggest to wait and see how the market does once 'sping'time hits. We could be looking at huge increases in inventory in many areas as people rush to the exits to cash in on their appreciation.

Whatever happens, I wish you the best of luck!!

This e-mail is sort of long, but I think there are some GREAT insights from somebody that has lived through several up-and-down real estate cycles. I'm sure many of you will be able to relate to this reader...and some of you will get sick to your stomach. Enjoy...
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I read your entry this morning and want to jump at the chance to write you an email. This isn’t so much about a FB as it is about my inability to get my mind around today’s housing market. I’ve recently moved to the SF Bay Area (Peninsula) and after looking for a house, announced to my realtor yesterday that I’m just not going to pay $1,000,000 for a one-car garage. It just isn’t going to happen. Sometimes I feel like a person from the Depression who can never see debt as anything but the path to ruin. Maybe it’s just my age – but I’m not THAT old!

I remember buying in the last housing frenzy – the late ‘80s. I remember the cars parked up and down the streets and the multiple offers. It was insane. I was in the middle of it all and so were all my friends. But - and I just discussed this at length with my husband – I don’t have ANY recollection of anybody taking out loans for 100% financing. Almost all of them were conforming with a full 20% down. A few here or there had less than a 20% down-payment, but for the most part, no one wanted to get into the PMI stuff. And I don’t remember anyone evading it through piggy-back loans! Or paying minimum payments amounting to less than interest and principal! Or lying about their income!

I remember people being desperate to buy because choices were slim. And the fear interest rates might go higher. But not because they felt prices would only go up. No one thought prices could go DOWN, but no one felt they’d be priced out forever if they didn’t pull the trigger immediately. If you found a place you could swing, you jumped at it. You had to live somewhere.

Which brings me to the next thing I don’t remember. I don’t remember ANYONE buying multiple houses for appreciation’s sake alone. I don’t remember ANY “investors”. I think this is the biggest difference to me. This and all the $100,000 chef’s kitchens and Mercedes. People in the ‘80s just didn’t spend money like that. There has been a fundamental shift in our country. Perhaps it’s here to stay and not to join in will be as unwise as the Depression era person forever after never taking on ANY debt. They just didn’t “get” it.

Or maybe it will be like the new web designers of the ‘90s thinking their 6-figure salaries were here to stay. And everyone who came before them deserved lower wages because THEY just didn’t “get” it. Yeah, right...

I have very good friends who also share the experience of buying in the ‘80s. She and her husband are in their early 50s. They bought a spectacular McMansion in SoCal about 5 years ago. Anyone would say they’ll be just fine because they bought awhile back and have some equity. But they put a lot of money into renovations so it’s not quite as rosy as it would appear on the surface. Thankfully, prices have really climbed and there’s still some equity there.

They took out a HELOC to cover the remodel and expected to pay it all back shortly after taking it out. But somehow, it didn’t get paid back but rather got rolled into a refinance with a 7 year adjustable. Because of job changes, the idea of refinancing to a fixed rate was out of the question. And now, it seems that my friend’s monthly income doesn’t meet her monthly expenses. Her husband just got a new contract which is good news. And she’s looking for a higher paying job to get back on track. But I don’t remember any of us with so little job security and simultaneously being so leveraged to debt.

My friends, until this latest housing boom, have always been prudent and conservative. Now, virtually everything is tied up in this house. They are faced with a house they can’t afford, an adjustable rate that will come due in 3 years. And they’re slowly recognizing there’s no way they can expect to live long term in this house. I asked my friend if the house was seen as a “not forever” place to live when they bought it. She said not exactly. It’s just been a slowly developing situation. They expect to gain more appreciation and have options when the adjustable forces their hand. But she’s nervous and sometimes thinks they should sell soon. Her husband is unwilling to even think about it. But mostly she’s very annoyed that a neighbor just sold his house for $200,000 less than asking. She describes him as being stupid when it comes to money.

Another, younger friend has totally cleaned out his equity to pay for renovations. He figures it will only help appreciation. He has a baby and a job with a young tech company. He gets positively ill whenever anybody suggests prices could go down. Or whenever anyone suggests rates could go up. Everything he owes is adjustable.

So having friends faced with these kinds of situations is something else I don’t ever remember seeing before. What a Through the Looking Glass world this has become! More debt is taken on with less job security! Houses become more burdensome with time, not less!

A mania has manifested itself in massive debt, multiple houses, shiny granite countertops, commercial stoves, plasma TVs and Mercedes cars. Happy times. Except the underside of it seems to have snuck up on us. Stress and pressure seems to be building terrifically. And fear. This nightmare will only fade away if positive appreciating numbers keep rolling in. That’s the gamble we’re all taking.
Thanks for your blog. It’s great.
_______________________

Have a great weekend everybody, and keep the comments coming. Feel free to hit the 'donate' button as well. This blog is taking more and more time, and I appreciate the people that have donated and/or gone through my site to shop at Amazon.com. EVERY little bit helps!!!

SoCalMtgGuy

67 Comments:

Blogger DannyHSDad said...

Great site! I came from thehousingbubble2 and like what I've read so far. I myself have helped few FB/pre-FB couples at our church and as your blog seems to point the way, things will probably get only worse. Sigh....

1/27/2006 2:49 AM  
Anonymous Anonymous said...

A great e-mail, and re-inforces some of the tragedy I see in some of my friends. The old goal was save some money, buy a house, pay it off, and you will have the freedom to do what you want. I see this bubble and crash as trapping many people for decades in large houses they dont need, and a continual struggle to pay the increasing mortgage, taxes, utilities , and insurance for it. A life of quiet desperation for sure.

1/27/2006 5:34 AM  
Blogger Nicholas Weaver said...

To chicago person:

The criteria I'd use (I can afford to buy someting reasonable, but I'm not) is: Are expendibles (tax-neutral-nonsavings) > rent or <= rent? And how long am I going to stay?

If the answer is <=, and you are going to stay there for 10+ years, I'd buy in a hot second.

The opportunity cost right now on the down payment isn't all THAT great (at 4% after tax and 100k: $300/month) so you can put it in your model, and the expendibles keep going downs as you pay down principle.

1/27/2006 5:51 AM  
Blogger r patrick said...

I was wondering what it was like back then...plus people then also as others here have said the only thing they did not ask for was a blood sample.

Next time I move I want it to be FOR GOOD. ( and not a three foot by 7 foot studio )

Many people I know the house has tuned into an anchor

1/27/2006 6:10 AM  
Anonymous Anonymous said...

The cost of energy (utilities and gas) property taxes, ARM readjustments and everyday price increases from Health insurance, drugs, tuition and food is putting massive squeeze on the middle/ lower class. It's not going to get any better either. many of the people livig way beyond their means sitting in 3000+ sq ft houses are going to be debt slaves. Hopefully prices for these bloated high fixed cost McMansions will hold near what they paid, but i really doubt it.
The move to downsize will be huge, but unfortunately those owning the big castles in middle class neighborhoods they are going to have tough time getting anywhere near the recent prices.

1/27/2006 6:20 AM  
Anonymous Anonymous said...

I wouldn't buy the condo but rent. So you say $200k in income. I hope you save alot of this after tax. It's time to build the warchest for future security. Wait a year then consider with bigger warchest and price reductions.
When buying a house and having a baby, do not strap yourself with little savings It's not worth the stress and added pressure. You want to enjoy your time with your baby. You can't turn back the clock.It goes fast!

1/27/2006 6:32 AM  
Anonymous Anonymous said...

To chicago reader-

Be careful about your assessment of expendibles after tax. With 200k in income, John Kerry and friends believe that you and your working spouse qualify as "rich", and thus are not paying your "fair share." At your income, particularly with children, you will find that the AMT and Pease phaseouts will eliminate most, if not all, of the tax benefits you expect to receive by owning.

1/27/2006 6:40 AM  
Blogger Cannon Fodder said...

Hey Chicago condo person:


500k w/ parking in the Loop doesn't sound too bad. What is the association fee costs? This is where a condo in the loop will get you in the shorts, financially speaking. Have you considered a different neighborhood, like Lincoln Square? You can get a detatched house for 600,000 to 1mil and still be close to the Brown line to work in the loop (30 min ride). My wife, daughter, and I lived in that neighborhood for several years and miss the area (in MN now). It is a nice family-oriented neighborhood with a great park (Welles Park), excellent kid-friendly resturants, and a small theater for those nice date nights out)

As far as the overall condo market in Chicago, have you this article from the Chicago Tribune:


http://www.chicagotribune.com/business/chi-0601260092jan26,1,919485.story?coll=chi-business-hed&ctrack=1&cset=true>Flat sales of condos hint thrill is leaving


Best of luck to ya.

1/27/2006 6:50 AM  
Blogger Armand Stein said...

I'm the Chicago reader who wants to be a f'd borrower.

Some more details.

We are looking at condos in the Loop (maybe a new construction in the East Loop or South loop, but not likely). There aren't many 3brs there. The alternative is a townhouse in East Lincoln Park. Reasons for condo in loop: walking to work is great, no stairs, covered/secure parking, Grant/Millennium Park nearby, hopefully many more people will move to the loop in the near future. Drawbacks: busy streets, slightly dirtier air than elsewhere in the city, noisier. I don't mind riding the bus or el, but want a <30 min door to door commute, and that's hard to achieve without living further than a block from an el stop.

AMT tax hasn't touched us yet, but we have almost no deductions. I just found out that you can't deduct student loans and IRAs once your income goes over a certain threshold. Taxes on the rich my a**. So now we have 2 small IRAs that we can never again add to. Can't even start a Roth IRA. We are maxing out our 401ks and have some pittance in educational savings. About half of our 100k down payment would come from an inheritance, and there is much more there, just not liquid. This is good because we can't spend any of it; doesn't really matter since I already have a little roadster (used, bought it last year, just after we decided to have kids - it's now or never I figured). As a funny aside, we got $200 back as EITC in 2003!

More to come
Armand

1/27/2006 7:36 AM  
Blogger Karen said...

Hey Chicago. Before you jump into home ownership, please, please, please do your homework.

You've got more than enough in income to spend 1k or so on a financial advisor (find someone independent with a tax person on staff) who can work through the numbers with you. Don't try to do this on your own; there's too much at stake.

This board does make for interesting reading, but it doesn't qualify as expert advice, even if there are some bright people posting here (insert pat on the back!). We don't know enough of the details.

Ask around your community for names. Personally, I found my CFP by asking a neighbor who's a banker for suggestions. He's a commercial loan officer who knows his stuff, and even he went looking for advice. That alone is great advertising for the value of a CFP.

You might also start your search here:

http://www.fpanet.org

Good luck.

1/27/2006 7:42 AM  
Blogger Lou Minatti said...

SoCal, before this is over we will see many young California homebuyers moving in with their parents. For their sake, I hope Mom and Dad were more sensible with their mortgages. It would suck if Mom and Dad lose their house too.

1/27/2006 7:45 AM  
Blogger town_mouse said...

just some advise about kids and condos - DON"T if you can help it. Rent until the oldest is 2 or 3, unless you can get a good deal sooner. By then they'll need a yard to run in. From experience I can tell you that a yard is worth the wait. Even a smallish house in a good neighbourhood. Just get a yard. Until the kids are 3 they are fine where-ever.

1/27/2006 7:48 AM  
Blogger DannyHSDad said...

Armand: sounds to me you should be talking to a good, higher than average tax accountant and/or lawyer, not free ("you get way you pay for") open blog for advice.

At least I would if I had inherited 6 or 7 figure worth of assets....

1/27/2006 7:52 AM  
Blogger Scott said...

Since price appreciation in the housing market has slowed considerably (at least in SoCal, where I live), and might very well depreciate, I'd suggest waiting. You say you and your wife make $200K/year - great, live off of $75k. In two years that $500K condo you're eyeing might be going for $500K still, and then you can buy in cash and not have the specter of monthly mortgage payments hanging over your head.

1/27/2006 7:56 AM  
Blogger DannyHSDad said...

As for children and space, I believe that having a yard is overrated: children will find ways to take advantage of whatever environment they are in (see, for example, parkour or extreme urban sport).

With my two sons, if we had to live in a condo, I'd probably be swinging across the floors and balconies right there with them.

Since we homeschool, I would shamelessly tell the neighbors: it's our P.E. time! :-)

1/27/2006 8:14 AM  
Blogger Karen said...

dannyhsdad

Agreed about the kids taking advantage of any space available! I also think the yard thing is over-rated. I'd take a nice playground over a big yard anyday.

Kids, once they reach about 4-yrs-old, love to be around other kids. Here in Maryland, there's a neighborhood of McMansions near me with huge yards, and every one of them has a giant playset in the back.

I never see any kids on those playsets, but I do see fathers wasting their Saturday mornings riding around on mowers. Either that or they hire an expensive lawncare service!

The local playground, however, is always packed with kids.

It makes me sad to think of all the money wasted on those $5k playsets, which will end up in the local landfill in a few years. That fabulous playground, however, will still going strong and bringing joy to the next generation of kids.

1/27/2006 8:27 AM  
Anonymous Anonymous said...

$220K in income and have barely saved the down payment? Plus, currently have a great deal on rent? Sounds like you have leaks in your wallet or purse. The last time my wife bought a house at the top we lost it. It’s a hell of a lot easier to spend borrowed money than money I worked for! How are the schools in that area? I live inner city and pay $1200 a month for school to keep my kid off drugs! Public schools no good and if I am going to work, there is no time to be home after school. So, maybe you can get them involved in sports to keep them busy after school? Come on fundraiser!

If I could go back I would… Move out of the city and commute on the train, Leave Mama at home to raise the kids, let the in-laws stay somewhere else to save the marriage, and not be in a hurry to buy in a city with a big terrorist bulls eye on it!

1/27/2006 8:33 AM  
Blogger KennyBabes said...

to Anonymous at 6:14

"John Kerry and friends believe that you and your working spouse qualify as "rich", and thus are not paying your "fair share." At your income, particularly with children, you will find that the AMT and Pease phaseouts will eliminate most, if not all, of the tax benefits you expect to receive by owning."

how ignorant are you.

John Kerry and friends arent in power, it doesnt matter spit what they think.

Arent you glad that W is working on repealing the Estate tax INSTEAD of the ATM.

The people that have all the power and are pulling the strings dont give a crap about you and your ATM troubles----and it aint "John Kerry and Friends".

1/27/2006 8:38 AM  
Blogger peterbob said...

Is it just me, or is it impossible to ever consider a household with $200K income and buying a place for 2.5 annual income as f@cked? Try earning $75K and the cheapest place going for 5 times that amount!

Look, I'm sure that you believe that your situation is important and that you want to do the best that you can, financially. But is just doesn't seem like this is a good place to get people very concerned about your issues. I know that sounds harsh, but it's my initial thought.

1/27/2006 8:39 AM  
Blogger drwende said...

Just want to wave to your SF Bay-Peninsula correspondent! I know exactly how you feel. Occasionally we wonder if we should have bought in 2002, when I thought prices were already out of line, but before I/O loans and 100% financing sent them into the stratosphere.

Then I look at how people are "affording" their houses, and I feel better. Sort of. It's weird to feel poor when hefty bucks in the bank -- but they're safer there than in the dubious equity of something bought today.

1/27/2006 8:55 AM  
Blogger Armand Stein said...

I'm the Chicago reader who wants to be a f'd borrower.

Thank you all for your comments. Indeed, I'm aware that the value of your advice is zero :). I just wanted to share our situation with strangers, I guess. If we are not f'd enough for you, think about us buying a 1m condo, I'm sure we could "qualify", but I'm not that crazy.

I am aware that we have been very lucky so far, with schools, jobs, marriage, etc. And hopefully the luck will continue now with kids. I'm aware that 200k is a large family income (I still can't believe it myself, this is my first job), and that it is harder to become f'd with it than with 75k. I can think of many things that can go badly. And we have no idea how much kids cost or how much work they are (except that it's "a lot").

And on top of all this, there is the damn housing bubble to contend with. Maybe Chicago is different. Wind-locked? Fat-locked?

Armand

1/27/2006 9:27 AM  
Blogger ajn said...

Another thing to remember.

Babies do not take up too much room. My 2 babies, 3 and 1, still sleep in our room.

I personally do not want a SFR. I want a condo or townhown because I do not want to spend so much time in the yard. I actually like gardening. But a couple raised beds on a deck will do it for me.

Oh and condos are cheaper.

1/27/2006 9:40 AM  
Anonymous Stressed_Renter said...

$200K income and it's your first job. I bet you work in RE related business. What line of work you do?

1/27/2006 9:51 AM  
Blogger mtnrunner2 said...

Armand, have you researched whether you have a housing bubble? What is the median price/per capita income ratio now, compared to historic? Has housing followed inflation, or risen much faster in the last 6 years? Would the mortgage payment be equivalent to rent; if higher, then it's overvalued.
Chicago median price and inventory has stayed constant over the past 5 months. The PMI report shows a 20% appreciation over the past 2 years, with a 14% chance of a price correction.
With your income and price range of house, it sounds like you are not a f*d borrower at all. The only question is if you will have a price correction.
A local realtor who is honest can go over the MLS data and tell you how many price reductions are coming up, how fast homes are selling, etc. so you can determine if the market is weakening. Most realtors just try to talk you into buying and give misleading info.
My guess is with the 20% runup over 2 years, there is some excess. Not as much as in CA, and if you have an inheritance anyway and can afford to lose $50K - $100K in equity (worst case scenario), then buy now before your kids is born. If you don't mind renting a while longer, wait and see what the market does.

1/27/2006 10:00 AM  
Blogger Scott said...

So now we have 2 small IRAs that we can never again add to. Can't even start a Roth IRA. We are maxing out our 401ks and have some pittance in educational savings.

Actually, you can still contribute to your traditional IRAs, you just won't receive a tax deducation. But the investments do grow tax-deferred. You're right about the Roth IRA, it was designed for middle-income folks, and your income puts you in the top 3% - hardly middle class. However, there is the new Roth 401(k) starting in 2006 which does not have income limits. Inquire with your HR department as to whether that option is available.

Finally, I hate to sound old fashioned, but why not focus on paying off your current debts (student loans) before going deeper into debt? That is, enter into your new home with a clean, empty balance sheet.

1/27/2006 10:39 AM  
Anonymous Anonymous said...

Dear Chicago Buyer,

Three loosely related comments:

1. Do some soul searching with your wife about what happens to your careers after children show up. I have friends here in the SF bay area who qualified for huge loans based on double-incomes, but became single-income families when mom come to believe that the baby was more important than the job.

2. The Loop thing bugs me. It's a great place, but your desire to buy there smells like a hedge. Are you sure that you want to buy a house at all, or are you being pressured into it? Regardless, I think that its unrealistic to believe that you'll live there more than three years if you start having children now.

3. You have no moral obligation to provide free guest housing for extended family. Filter out buy/no buy factors that have nothing to do with establishing your family's happiness and financial future.

Good luck to you

1/27/2006 10:44 AM  
Anonymous Anonymous said...

The 2nd email is great. Glad to see an old timer who shares similar attitudes about money. I thought we are distinct....

1/27/2006 11:49 AM  
Blogger mtnrunner2 said...

I agree w/ anonymous. Buy a house based on one income, in case you and your wife decide that she'll be the one to raise the kids (vs. nanny or daycare). Great point, and one I forgot to raise before.

1/27/2006 12:19 PM  
Blogger WArenter said...

Chicago buyer -
I think your question is relevant. No matter what your income level, not throwing money away on overpriced housing is smart. Even if you can afford to lose $$$ buying in a bubble, why do it? Be smart with your money, your family will thank you for it.

--------------------------

All these stories that people share about people they know that are getting into more and more debt are down right disturbing. It would appear that the housing bubble has created a debt trap for many, even those whe are not recent buyers. I guess it really is a credit bubble.

1/27/2006 12:27 PM  
Blogger Cannon Fodder said...

The alternative is a townhouse in East Lincoln Park. Reasons for condo in loop: walking to work is great, no stairs, covered/secure parking, Grant/Millennium Park nearby, hopefully many more people will move to the loop in the near future. Drawbacks: busy streets, slightly dirtier air than elsewhere in the city, noisier. I don't mind riding the bus or el, but want a <30 min door to door commute, and that's hard to achieve without living further than a block from an el stop.

My wife and I lived two blocks from the Western stop on the Brown Line. It was a very quiet neighborhood (your governor lives in that neighborhood i.e. minimal noise/crime issues with state patrol there 24/7). It is true that off street parking is slim in most areas in the city, but it comes down to a lifestyle choice.

I was a stay-at-home dad (I was a hs teacher, my wife worked in commerical real estate....you do the math), and we lived comfortably on 70k a year. We chose not to own a car. If we needed a car, I went to Avi$ in the loop. It was still cheaper than a car payment and insurance. The commute was longer than 30 min (40 min from door to Boeing bldg) from door to door, but it was very relaxing for my wife (and I when I was working) by taking the eL. We were able to start saving towards a house payment (and other life happens expenses).

There is no law that says you have to buy when you have kids. Again, it depends on your personal lifetyle choices that you and your family choose.

Hope this helps!

1/27/2006 12:27 PM  
Blogger Karen said...

One more in agreement about basing your home purchase on one income if possible. My husband and I have done that with the last three of our four purchases, and it has served us very well.

If two of you work, you have money in the bank for emergencies and a little extra for dinners out and nice vacations. If for some reason only one of you is working you can still pay the bills.

Hey, life happens, and you never know when a job loss, medical emergency, or time off to raise kids can put a crimp in your best laid plans.

BTW, before you get into any house, check to make sure that your insurance (i.e. health, disability, and life) is in order. This is doubly important once you begin adding to your family. If you can't afford to insure yourself AND pay the mortgage, you can't afford the house.

1/27/2006 12:40 PM  
Anonymous CG said...

I think one word needs to be said - "ENERGY". You live in a cold area in the winter and hot in the summer. Just what do you expect the energy costs to be? Can you take a train or bus to work if gasoline goes to 5.00. What happens in the winter if Nat gas goes to $15.00? Can you and the family survive if there are brownouts in the summer and there is no air conditioning? I live in Denver and basically took out a F'd borrower loan to buy some time while I sell this energy black hole of a house. It is only 2400 sf and 3 bedrooms. I picked it because it is near a new train system to downtown and new shopping. This area used to be suburbs, but now is almost urban. Again look and energy costs, are you willing to spend 1000.00 a month on auto fuel, nat gas, and electricity?
The US is in big big trouble. Energy is what will bring down the housing market I have a condo in florida that is to become my new primary residence, despite the Hurricanes. Good Luck

1/27/2006 12:51 PM  
Blogger Joe Schmoe said...

Saw our Chicago friend's post on housingbubble2 yesterday, thoguht about it a lot, glad SoCal posted hs email here.

Agree that the house should be purchased on only one income. There are plenty of nice and affordable houses in Chicago that aren't terribly expensive. Like the stay-at-home dad, I used to live in Ravesnwood, just off the Brown line, and my office on LaSalle was a 40 minute commute away, door-to-door. There are some really nice prewar buildings in Ravenswood, and it is probably even more gentrified today than it was 4 years ago when I left Chicago. It's still fairly affordable, though.

Also agree that the Loop isn't really a great place to raise small children. For infants, it's no problem. But when your kids are 4 or 5, they will want to go to the playground -- but there is no playground. At 6 and 7, they will want to go over to freinds' houses to play -- but there are no other kids in the neighborhood their age (look closely, you think you see lots of families with "kids," but most are infants -- you'll see lots of strollers but very few kids over the age of 5 or so). You are going to have to send your kids to private schools, without question (the "magnet school" concept is mostly BS -- they're all "magnet schools" and "charter schools" now), so be sure to factor in that expense.

Probably the single best piece of advice is to forget about bedroom #3. Three bedroom condos in the Loop, and much of the rest of the city for that matter, are incredibly rare. You are going to pay a huge, huge premium for bedroom #3, and it just isn't worth it. And your parents (and in-laws) would rather sleep on the fold-out couch in the living room than see you waste money or take on unneeded debt and the horriffic stress that accompanies it just so they won't have to stay at Motel 6).

1/27/2006 12:58 PM  
Anonymous Anonymous said...

CG,

We will be moving back to Denver this summer, after being away for 15+ years. How is the market there? Is it your impression that home "owners" in large numbers are overextended on exotic loans? I keep wondering if we should look for a house in 2006 or wait for things to shake out little more. Thanks.

CM

1/27/2006 1:02 PM  
Anonymous Anonymous said...

CG,
Forgot to ask--I heard that there were starting to be a fair number of short sales in CO? Have you heard anything to that effect?

CM

1/27/2006 1:04 PM  
Anonymous CG said...

CM

I think the market in urban Denver is stable, just stay away from places like Highlands Ranch and the far suburbs in Franktown and Parker. Good buys can be had in the following South East areas. DU ( Denver Univ neighorhood), University Park,and Southmoor. I would choose south because it is easy to get down town and the the tech center too. Wanna rent my house? I was a bit dramatic when I called my own house a energy black hole, really only spending $200 a month on utilities, but I live alone and turn things down at night. I have not heard about short sales here much. But I live in Southmoor, an established neighborhood, very few homes for sale here.

CG

1/27/2006 1:30 PM  
Anonymous Anonymous said...

come on stein...500k? w/ that kinda income, u should go for 800k house at least..
how would u show this to friends during hanukka times.what a klutz.

1/27/2006 1:32 PM  
Blogger drwende said...

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If Jesus wants me to take out an interest-only loan, will he make sure the rates don't rise again?

1/27/2006 3:13 PM  
Blogger AZgolfer said...

SoCal

I am surprised that there were not more comments on the SECOND e-mail you listed in this thread. I thought that e-mail was much more interesting. How the sender can not remember investors, 100% financing, piggy back loans, stated income, etc in the last housing craze. I can not remember these things happening either. Makes you wonder just how scarry this whole thing really is.

1/27/2006 4:06 PM  
Blogger Wes D said...

Let me put this in perspective. Assuming that housing is adding 1.5% to GDP right now (which is low considering that many say 1.6-2.5), we would probably be in the second quarter of a recession right now. (1.1-1.5= -.04% GDP).

If that isn't enough to scare anyone then I don't know what it will take.

(disclaimer: expected GDP growth of 5% 1Q06 will certainly be revised down now due to the weak performance)

1/27/2006 4:08 PM  
Anonymous Anonymous said...

Chicago buyer-

We have very similar situation, I guess. The only difference is that you're in Chicago, I'm in Maryland (which has a bigger bubble problem than Chicago) right now.

We moved here from Chicago about 5 months ago after saling our SFH in Naperville, so I may say I knew Chicago R/E quite a bit with friends living all over the city.

First of all, what I want to say is there is a bubble around Chicago loop and northside. I don't known whether you're familiar with Univeristy Village at the outer loop or not. A 3-bedroom TH was around $400-450K at 2001/2 when it was planned to build, after 3 years, my friend just bought one last year at around $650K. With 50% appreciation in 3 years in such a crappy neighborhood, there must be something irrational going on there.

Why would I say our situations are similar? 'Cause we also make >=$200K combined per year (but we are not as lucky as you to have inheritance), however we do have about $100K in our savings to put as down payment. In our targeted area, we could also buy $500K 3-bd/2-bt condos without stretching out. We don't have any debt except about $10K left one of our cars (which was bought with 0 interest, that's why we are not in a hurry to pay it off). And we are planning to have a child next year. So you see, we are really very similar in those aspects. But we decide not to buy right now, for the following reasons:

1. After owing a home, we knew roughly what it would take to own one. Mortgage is just part of it; there are utilities & taxes & unexpected expenses when things happen. Moreover, with kids on the way, there will be more expenses such as babysitter, education funds, and in your case probably money for private schools later on. So even buying a 2.5 time of gross earnings R/E with 20% down payment could not qualify you as a FB, at the end of the day, you would probably find out that you don't have that much of money left after those expenses. Besides, we also realized that life is not just about owing a home, the "American Dream" of homeownership is way too much overrated right now and renting isn't that bad at all.

2. You also need the mentality to prepare for the worst when the market goes down (or flat out) even price is not a problem for you right now. And it's not easy. I begin to see people around me who bought at the peak were getting so nervous or so defensive about their decisions during casual conversations even they are not FB. Think it as this way, let's just say hypothetically the price will depreciate for the next 3 years at about 3% per year. It doesn't sound like much, but it means you'll lose about $15K per year, or in other words about $40 per day one the property only. If you REALLY, REALLY, don't mind that the property loses its value for about 20% to 30% in the next 5-10 years, then you may proceed.

3. I know each one has his/her own priorities. For my case, we don't see owning a home such an urgent issue. Therefore our strategy right now -- live as if only one of us is earning and save & invest on some conservative investments. After five years, even the R/E price stays the same (which is highly unlikely), we can put down much more and in better position financially no matter what. For kids under the age of 3, they don't need that much of living space, and they probably would not realize the difference between owing and renting. I was living on rental properties until I was 12 and I still grew up OK, so why would having a kid become such a important reason nowadays for people to buy R/E? Living only on one salary, we are still very happy. Last year, we bought a 42-in HDTV, traded in one of our old cars with a new one with cash, just went to a Caribbean cruise trip for Christmas, and no CC debt. We wouldn't want to sacrifice any of these just for fulfilling a dream of owning a property.

If buying is not such an urgent issue for you right now (think it over why you want to buy with the downturn coming, just for the baby who knows nothing), why not take your time and wait for another couple of months? It wouldn't hurt anyway. If your urge of buying overweights any other things on your list, go ahead and good luck!

1/27/2006 5:27 PM  
Blogger Karen said...

Hey Anon 5:27

I'm here in Maryland, too. Yes, I agree, houses are expensive here, but I wasn't under the impression that condos were going for $500k. Can I ask where you are looking?

1/27/2006 6:02 PM  
Blogger EPRobert said...

$200k?

Seriously just buy a damn place and stop whining.


No sympathy from the millions of californians who make $100k and are utterly priced out of the market.

1/27/2006 6:20 PM  
Anonymous Anonymous said...

Great thread - refreshingly limited flaming...

Just a couple of thoughts to contribute:

Chicago - keep in mind that every young, expecting mother-to-be wants to 'own' - it's a deeply ingraned instinct known as 'nesting'. Needless to say, that doesn't mean that it's a good financial idea (few emotional impulses are).

My wife and I are working on #2 daughter right now (we live in SF bay area) and I thank my lucky stars that we didn't buy 18 mos. ago when the 1st was born and the pressure from my wife was high. As it turned out, my wife wanted to leave her six-figure job after our 1st was born, and I became the sole earner.

She did, and it's been wonderful for our daughter to have her mother home. My wife never could have left her job if we were chained to a mortgage.

Sure, we might have some good equity built up by now, but the added financial stress and limited time with my daughter would have just ruined my wife (this I know).

And of course, the equity we might have built in the last 18 mos might be gone in the next...

1/27/2006 6:26 PM  
Anonymous Anonymous said...

seen on the 405 this morning (so california)

small ford suv...

I4close (lic. plate)

that individual may be busy in the coming years

1/27/2006 6:31 PM  
Anonymous Anonymous said...

seen on the 405 this morning (so california)

small ford suv...

I4close (lic. plate)

that individual may be busy in the coming years

1/27/2006 6:34 PM  
Anonymous Anonymous said...

Karen -

Check out condos in Bethesda/South Rockville area.

And look at this one:
http://www.centexhomes.com/
Washington-DC/N43900.asp

$449K is just for one-bedroom + den models.

1/27/2006 7:03 PM  
Anonymous Anonymous said...

Karen -

This one is listed at $549K

http://www.homedatabase.com/
cgi-bin/aa.fcgi?+OTZhZTU4MDFm
ZmJjM2FkZmI5NjVjYTFlNTM2Y2ZhZW
ESlI0iZbI78etCOGgOJ6rxLf1gVte4
iADZ53bKEL9a+i%2fwLczTRmq6dtmK
jSh6f17NJfUZcA%3d%3d

1/27/2006 7:10 PM  
Blogger Karen said...

Holy Cow! And to think I thought it was bad up here in Howard County.

Any particular reason you are looking in Bethesda/Rockville? You might be able to find something more affordable if you headed north. Plus, the traffic isn't as congested up here, unless, of course, you're commuting to D.C.

1/27/2006 7:29 PM  
Anonymous Anonymous said...


I'm here in Maryland, too. Yes, I agree, houses are expensive here, but I wasn't under the impression that condos were going for $500k. Can I ask where you are looking?

I'm not original anon but I live in Rockville.
Theres a new townhome that are starting at $900k next to me. It's little track of land right by the road. End units are price at 1million and change. There is condo going up next to Montrose (rt270) which starts around 800k for 2beds and townhomes starting at 1.5mil for townhomes. Least in townhome you can built elevator as option.

1/28/2006 5:48 AM  
Blogger Stephanie 81 said...

Montgomery County prices are extremely inflated. I cannot grasp WHY a townhome should cost 800k-1.5mil.

1/28/2006 6:56 AM  
Blogger Karen said...

Who's buying those houses? There is no way federal employees could reasonably afford that even if both are at the peak of their careers. It's insane.

I thought townhomes in Howard County were out-of-sight at $400k, and we're in the best school district in Maryland. You could buy a beautiful 4bd/3bth colonial with a big yard for about $700k up here. No wonder there are so many DC'ers driving that crazy commute.

About the townhome thing for those west coast readers who don't get it. Tons of people here live in townhomes and make it work long-term. It's not necessarily transitional housing the way it is in California, especially near D.C., where space is at a premium. Still, $1.5 is nuts.

1/28/2006 8:19 AM  
Anonymous Anonymous said...

The yard is everything and not at all overrated. A condo is cramped would avoid.
Do not buy now. Save save save. money in the bank can solve life's simplest problems.

1/28/2006 10:49 AM  
Anonymous Anonymous said...

There has never been a shortage of expensive housing. However, there have been shortages of cash to buy it.

1/28/2006 12:15 PM  
Anonymous Anonymous said...

In today’s Chronicle:

Homeowners are superior to renters

http://www.sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2006/01/29/REG8SGSU7I1.DTL

1/29/2006 8:25 AM  
Anonymous Anonymous said...

Fed employee's do make a decent wage if you are able to become a commissioned officer (applicable w/ FDA, CDC, NIH, EPA, and many other depts.). The base salary is ok, but when you add in the perks when you sign up as a CO it will double or some times triple you base salary (housing, food, travel, etc. comp. which is all tax free - MD area your looking at $2,400/month cash). 2 incomes like that plus base $50k/yr each and free health ins. and your at $200k easily (that you tax payers).

1/29/2006 12:30 PM  
Blogger drwende said...

The "homeowners are more mentally healthy than renters" article this morning reminded me... a few months ago, the NYT ran an article on how anyone who was still renting had "commitment issues" and needed therapy. Prices started to slip within three months after that.

I figure that Chronicle article is the beginning of the end for the housing market here in SF.

1/29/2006 2:02 PM  
Anonymous Anonymous said...

Wow.. this sounds so surreal..

How can people live like this?


Thanks god I am renting under $600.00 with laundry, heat, water, cable included with a view in a nice part of town.

My sleep is deep and sweet, and each morning a long massaging stretch and a deep breath of crisp cool mountain air..

So who cares about driving a fancy car, implants or painted nails?

Finally, guess what.. you cant take your hummer or shiny granite top with you..not even the implants.

northerngirl

1/29/2006 2:34 PM  
Blogger Wes D said...

I think home ownership is a great goal under the right circumstances.

I rent because I choose too. I can quit my job tomorrow without recourse. I can be packed up and 20 states away in 2 days. I pay a little extra (in lost appreciation) for that ability. My rent is 1/2 what the typical house/condo payment is here.

I also endure endless comments from well-meaning owner friends who say I'm wasting my money. But looking at them, they are a different breed. They spend all weekend at home watching TV either because they have no extra income or don't like to go out. I prefer to spend my weekends away, visiting, fishing, or something else. I don't have to worry about a lawn, heating a pool, or dealing with asshole neighbors who park minivans in the backyard.

Most of the tract home subdivisions around here are one step above or below apartment living. The houses are close, boring, have no yard, and have expensive payments and having to deal with neighbors who won't move out after 12 months.

Renting works for me at this point in my life regardless of what studies show.

1/29/2006 4:21 PM  
Blogger Wes D said...

Oh one more thing, renting also has one huge advantage.

I don't have to listen to home owners brag about their houses. "We have granite and stainless steel" and "we have a 2-foot kitchen extension". My friends in the suburbs remind me of sitting in the high school lunchroom. Back then it was "my car has a V8 and will go 100" but now it's "I have the Toyota SUV and I also have the extra window in my bathroom and 2-foot deck extension".

I'm not joking either, I have heard complete conversations more than once along those lines. The suburb living is nothing more than a yuppie rat race.

1/29/2006 4:24 PM  
Blogger mtnrunner2 said...

SoCalmtgGuy- suggestions for topics:
1. MBS market, and who gets f*d when the defaults start
2. Refinancing and mortgage stories of people who are turned away. More than usual? Do fewer people qualify based on the higher rate and the lower equity gain? Is the shakeout already starting?

Also, I was happy to make a donation to you. Some of us may just want to drop in for free, but we have to realize that without supporting you, you may not be doing this blog next week...

1/29/2006 6:00 PM  
Blogger Stephanie 81 said...

It is amazing how homeowners make renters out to be an abomination like if you rent, you might as well wear a scarlet letter.

This belief that everyone needs to own a home and you're incomplete without one is not the gospel accoring to Matthew.

BTW, Karen, My fiance and I have considered Howard County. I love the area but the commute would definitely be a pain in the arse.

1/29/2006 6:18 PM  
Blogger SoCalMtgGuy said...

mtnrunner2,

Thank you for the comment about donations. I understand that many will just come here for free, and that is fine. I'm not expecting many to donate. I'm working on a few things so that I can generate some revenue other ways. Not only does the blog take time, but the amount of e-mail is steadily increasing.

I'm glad I'm getting more traffic and e-mails, but it is starting to become a lot more than just 'something to do at night'. I have replied to every e-mail I have received, and I try to help each person. Some of the e-mails are getting much more involved, and it is getting out of the realm of some 'quick and free' help on my part.

Obviously, ad revenue and affiliate programs don't make that much money for the time I am putting in, so I am thinking about adding a 'consulting' part to the website. People would pay a fee, and I would act as an unbiased 3rd party with no vested interests and go over the pros and cons along with other info about their mortgage/purchase/refi/etc.

The fee wouldn't be anything huge, but enough to pay me for my time, my experience, and the honest opinion they would receive.

Several people have already said they like the idea. It would really help me keep this blog going...as I really ENJOY it...more so than my 'mortgage' job.

What do you think?

SoCalMtgGuy

1/29/2006 6:54 PM  
Blogger mtnrunner2 said...

SoCalMtgGuy - give the consulting idea a try. You have nothing to lose by trying it. You could also charge for viewing, and try that. The Pigginton site has a fee for the premium content, but I can honestly say I would pay either of you to view your site, say $6 or $8/month. That's what Dr. Laura charges for the computer access to her radio show. Consumer Reports charges $35/yr for access. I think it's fair to charge people for the entertainment they get from something like this blog. I would pay for it.
Signed, a San Diego fan

1/29/2006 8:55 PM  
Blogger SoCalMtgGuy said...

Thanks mtnrunner!

I will not charge a fee for the site. That would only happen if I ever had to pay large bandwidth charges, and I'm far from that.

I think I will give the 'consultant' route a shot. I think that is the best, and most fair way for me to keep making money and keeping the blog going.

Thanks for the input!

SoCalMtgGuy

1/29/2006 9:26 PM  
Blogger Karen said...

Stephanie81

Enough said about the commute. It's a bear!

Did you consider Frederick? It seems way out, but a lot of people who work in D.C. live there and take the train.

If your plan is not to stay in this part of the country, however, it might be best to stay out of the market and bank the money. I'm certain that this whole area is in for a ride as RE begins its decline. I mean, who are they kidding? A million-and-a-half for a townhouse? Insanity!

As such, we're in the process of going back west where we will be closer to family and plan to homestead. I'm done with the whole mid-atlantic thing.

Good luck in your search.

1/30/2006 7:14 AM  
Anonymous QUALITY STOCKS UNDER 5 DOLLARS said...

Nice skyline

1/27/2013 5:31 PM  

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